Tired Tiger, Dwindling Dragon?

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"Chinas rapid GDP growth cannot in itself explain the jump in demand for metals. The key lies instead in Chinas investment boom. End-use statistics are not readily available for China, but the degree to which investment spending is commodity-intensive can be shown in US data. Construction accounts for only 8% of US GDP. But construction alone accounts for 14% of total US demand for aluminium, 20% of iron, 45% of zinc and 49% of copper. In addition, other investment uses will also have resulted in heavy demand for these commodities. As investment in general (and construction in particular) is a much higher proportion of GDP in China, so we must expect investment to account for the majority of Chinas demand for metals.

This is not sustainable. An investment ratio of almost 50% is unprecedented compared both to Chinas own history and to other emerging markets. Premier Wen has stated bluntly that "investment is still expanding too fast", and the government plans to rebalance the economy from investment spending towards consumer goods and services. Specific measures have already been taken to slow lending: interest rates were raised in April, and a range of restrictive new "guidelines" has been introduced to restrain lending."

CE's conclusion: "Over recent years global demand for metals has been boosted more than anything else by the investment boom within China. But investment is set to decelerate as the Chinese authorities pursue their policy of rebalancing growth from investment into consumption. Thus overall growth in demand for metals is set to decelerate sharply."

The premonitory report also contains equally compelling myth-busting facts about India, but we will leave that for another day.

Friday's economic data may provide more reasons to trade the range, but the market is already looking down the road at bigger fish to fry. Fed action or lack thereof, Wall Street bad news (but especially the lack thereof) and the behaviour of funds vis a vis commodities as a group. Before 'deleveraging' became the overused word of the day, 'sector rotation' gave the complex quite a boost. With the merry-go-round at high RPMs, many are watching the riders and the sturdiness of their horses.

Happy Trading.